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Published March 1992 | public
Journal Article

Monopoly Pricing and Regulatory Oversight


This paper analyzes the interaction between a regulator and monopolist in the determination of the price for the monopolist's product, where only the monoplast knows ex ante its true marginal cost of production. The regulator observes the market price proposed by the monopolist and decides whether to hold a rate hearing, where suck a hearing is a costly means of verifying the monopolist's marginal cost. Subsequent to a rate hearing, the regulator can impose a market price for the monopolist's product; in the absence of a rate hearing, the market price is set equal to the monopolist's proposed price. Equilibrium behavior by the monopolist and regulator is characterized, and the degree of regulatory "activism," as defined by the probability a rate hearing is held, is seen to vary ex post with the monopolist's true marginal cost.

Additional Information

© 1992 John Wiley & sons. This is a revised version of an earlier article titled "Regulatory Auditing without Commitment." I would like to thank seminar participants at Carnegie-Mellon, the University of Pennsylvania, the Hoover Institution, and the University of Toronto for comments. I would especially like to thank Dan Spulber, and an anonymous referee of this journal, for numerous helpful suggestions. Financial support from the National Science Foundation and the Sloan Foundation is also gratefully acknowledged.

Additional details

August 20, 2023
October 18, 2023